Question

The transactions listed below are typical of those involving Amalgamated Textiles and American Fashions. Amalgamated is a wholesale merchandiser and American Fashions is a retail merchandiser. Assume all sales of merchandise from Amalgamated to American Fashions are made with terms n/60, and the two companies use perpetual inventory systems. Assume the following transactions between the two companies occurred in the order listed during the year ended December 31.

1. Amalgamated sold merchandise to American Fashions at a selling price of $245,000. The merchandise had cost Amalgamated $181,000.
2. Two days later, American Fashions returned goods that had been sold to the company at a price of $22,500 and complained to Amalgamated that some of the remaining merchandise differed from what American Fashions had ordered. Amalgamated agreed to give an allowance of $6,500 to American Fashions. The goods returned by American Fashions had cost Amalgamated $16,770.
3. Just three days later, American Fashions paid Amalgamated, which settled all amounts owed.

1. Indicate the amount and direction of the effect (+ for increase, − for decrease, and NE for no effect) of each transaction on the Inventory balance of American Fashions. (Enter all amounts as positive values.)

2. Prepare the journal entries American Fashions would record. TIP: The selling price charged by the seller is the purchaser’s cost. (If no entry is required for a transaction/event, select "No Journal Entry Required" in the first account field.)

Answer 1

1. Effect of transaction on Inventory:

• a. Since purchases are made, inventory is Increased. So '+'
• b. Since goods are returned, inventory is Decreased. So '-'
• c. Since no goods are involved, no impact on Inventory. So NE.

2.

A	Inventory A/c Dr	245000
	To Accounts Payable		245000
	(Purchases recorded)
B	Accounts Payable a/c (22500+6500) Dr	29000
	To Inventory a/c		29000
	(Being Goods returned and allowance on remaining goods received)
C	Accounts Payable a/c Dr (245000-29000)	216000
	To Cash a/c		216000
	Payment made.